What should you enter?
With the introduction of the 'expected loss' model, IFRS 9 provides for an improvement in current provisions for credit risk. In the 'actual loss' model, companies often made no provisions at all for receivables that are not yet past due. IFRS 9 ensures that the risk of losses inherent in receivables is recognised and covered. Even if the expected losses will be low.
Thus, data related to the loss in case of future default becomes important, as well as other external risk factors such as macroeconomic developments. Data analyses should be carried out in a uniform manner for all regions. Sector-specific factors should be taken into account, while ensuring the transparency and accountability of the underlying processes.
Once the data analysis requirements have been met, the next challenge is to fit all the credit parameters needed to calculate expected losses (read: provisioning for bad debts) into a model. In doing so, one can choose from a variety of approaches, each of which can produce different values for the estimates of expected losses. The calculations performed in the model are likely to be segmented by region, sector, product type or debtor rating. They should be verifiable and provide all the data needed for reporting under IFRS 9.
Various alternatives exist for determining expected loss provisions, such as a 'provision matrix'. This looks at the relationship between the level of arrears and the occurrence of credit losses, which is especially relevant for trade debtors at corporates.
How Xolv can help you
The cover provided by credit insurance reduces the requirements for bad debt provisions. With credit insurance, you are also covered against unexpected defaults, reducing volatility on the income statement. We can advise you on this and can also help you with:
- Obtain correct information and data, via your own business intelligence tools;
- Setting up your processes for bad debt provisions;
- Saving time - our platforms support your process for provisions of bad debts;
- Debt collection support.
Want to know more about opportunities to improve your current credit risk provisions? Then contact us at info@xolv.nl or 073 - 820 02 95. Our specialists will be happy to talk to you.
